Steps Three Starting in to a Business
Company Structure
The Company structure you
select for your business is
critical. It influences the
Director’s personal liability,
the ability to raise funding,
impacts the liability for tax
and the paperwork required.
Learn which structure is the best for you, as we review
the different types of company structure, and the
advantages and disadvantages of each.
Common structures are;-
The legal structure of the company influences the
liability for tax, the paperwork your business has to
complete, the personal liability for the directors and
your ability to raise funding for the business. So this is
an important decision.
Sole partner or proprietor, or sole trader
Partnership
Limited company
The limited liability company (LLC)
Limited liability partnership (LLP).
Employee ownership
Not for profit
Charity
Sole trader
The most basic structure is the sole trader or
proprietorship, which usually involves just one person
who owns and operates the business. You have
complete control over your business and make all the
decisions.
If you decide to start your business as a sole trader but
later decide to take on partners, you can reorganize as
a partnership or other entity.
The tax aspects of a sole proprietorship are simple.
The income and expenses are included on your personal
income tax return. This means that any business losses
you suffer may offset the income you have earned from
other sources.
The disadvantage is that you are personally responsible
for your company’s liabilities. As a result, you are
placing your assets at risk, and they could be seized to
satisfy a business debt or a legal claim filed against
you.
Raising money may be difficult. Banks and other
financing sources may be reluctant to make business
loans to sole traders, so you will have to depend on
your own financing sources, such as savings, home
equity or family loans.
Partnership
If your business will be owned and run by several
people, structuring your business as a partnership may
be right for you.
Partnerships can be general partnerships or limited
partnerships. General partners are liable for all debts
and obligations of the company, limited partners can
contribute capital and are not liable for debts and
obligations over that amount as long as they do not
receive back their contribution or take part in the
management of the business.
Limited partnerships are more complex administratively;
a general partnership is much easier to form.
One of the major advantages of a partnership is the tax
treatment. A partnership does not pay tax on its
income but passes any profits or losses to the
individual partners.
But personal liability is an issue if you use a general
partnership. General partners are personally liable for
the partnership’s obligations and debts. Unless the
partnership agreement forbids it, each general partner
can act on behalf of the partnership, and may take out
loans and make decisions that will affect and be
legally binding on all the partners.
Partnerships are more expensive to establish than sole
proprietorships because they require more legal and
accounting services.
Corporation or limited company
The corporate structure is more complex and expensive
than most other business structures. A corporation or
limited company is an independent legal entity,
separate from its owners; it has to comply with more
regulations and tax requirements.
The biggest benefit for a business that is incorporated
is the liability protection. A corporation’s debt is not
considered that of its owners, so if you organize your
business as a corporation, your personal assets are not
at risk.
A corporation can retain some of its profits without the
owner paying tax on them. However many banks and
finance companies will often insist on Directors
offering personal guarantees for business loans.
Limited companies or corporations can be privately or
publicly owned.
It is also easier for a public corporation to raise
money, by selling stock to raise funds. Corporations do
not depend on the involvement of named partners but
can continue to trade, even if one of the shareholders
retires, dies or sells the shares.
Disadvantages are higher costs, and more complex
rules and regulations. You will probably need the
services of accountants and lawyers.
Another drawback to forming a public corporation is the
tax situation. Companies pay corporate income tax but
earnings distributed to shareholders as dividends are
taxed as personal income. However salaries and
compensation are paid before corporation tax.
A shareholders’ agreement can provide for and deal
with other important issues, including:
board constitution and control of the management of
the business
contributions of each party and how those
contributions may be applied
agreeing and amending a business plan
terms on which shares can be transferred
distribution policy
reserved matters to protect any minority
shareholders
confidentiality and restrictive covenants
ownership of intellectual property rights
Although these points can be included in the company’s
articles of association, most of them will not be
included by default on the incorporation of a company,
so would need to be amended. The articles of
association is a public document and any provisions
included would be subject to company law, limiting the
scope of bespoke provisions.
The shareholders’ agreement is a private document,
enforceable only between the parties. This affords
flexibility to tailor the provisions according to personal
requirements and circumstances.
The parties’ exit strategies should be considered when
drawing up these documents, and may be factored into
agreements.
Employee ownership
This a business model in which employees totally or
significantly own the company.
There are several formats:
The workforce directly own most or all of the share
capital
The share capital held in trust for the benefit of the
employees;
A hybrid of these two formats.
Employee ownership is becoming a popular alternative
business structure for start-ups seeking employee
commitment, long-established businesses dealing with a
succession challenge, or new forms of public service
delivery vehicles.
In the UK, employee ownership already contributes
more than £30bn each year to GDP. Growing interest
in this form of business structure in both the private
and public sector led to a 10% increase in the number
of employee owned companies created in the UK in
2012.
Economic competitiveness and high performance are a
feature of employee owned business, which tend to
have higher productivity, greater levels of innovation,
better resilience to economic turbulence and more
engaged workers than externally owned organisations.
Shares in employee owned businesses have significantly
outperformed those in the FTSE All-Share Index over
the last 15 years.
The implementation of employee ownership can be
simple and straightforward. The costs of creating an
employee owned business from the outset or achieving
an employee buyout are modest compared with other
types of company formations or mergers and
acquisitions.
Building a structure that creates a genuine sense of
ownership amongst employees is one of the
considerations when selecting the model.
Other issues to be considered include;-
How the transfer to employee ownership will be
funded
long term safeguards for employees?
How will the voice of the employees be heard?
How will senior managers be free to commercially
drive the business, and still be properly accountable
to the employee owners?
The sense of purpose and commitment that employee
ownership delivers makes this an attractive option. It
encourages retention of the very best talent to enable
businesses to compete successfully.
A practical guide to setting up employee owned
businesses in the UK is published by the Employee
Ownership Association.
The non-profit and charity
sector
The purpose of the non-profit sector is to improve and
enrich society, and create social wealth rather than
material wealth. Firms in this sector exists to make a
difference to society rather than to make financial
profits.
This is also referred to as the third sector, the
Voluntary and Community Sector (VCS), the not-for-
profit sector, the charity sector, the social sector. It is
made up of many different types of activity affecting
many aspects of society.
The term, the third sector, indicates that it sits
between government (the public sector) and the private
or commercial sector.
These companies can exist in a range of formats from
social enterprises, trades unions, public arts
organisations, community interest companies, voluntary
and community organisations, independent schools,
faith groups, housing associations, friendly societies,
and mutual societies.
They must be registered and approved by the relevant
governing body and abide by their regulations. Because
they broadly exist for public benefit they are usually
eligible for a range of income and property tax
exemptions.
Whatever option you choose for your structure, the
name you choose for your business should reflect the
image you want to project to your market. Select one
that’s easy to pronounce and remember. And make sure
that it’s not already in use, that it is available as a
web address and will work on your business stationery
Company Structure
The Company structure you
select for your business is
critical. It influences the
Director’s personal liability,
the ability to raise funding,
impacts the liability for tax
and the paperwork required.
Learn which structure is the best for you, as we review
the different types of company structure, and the
advantages and disadvantages of each.
Common structures are;-
The legal structure of the company influences the
liability for tax, the paperwork your business has to
complete, the personal liability for the directors and
your ability to raise funding for the business. So this is
an important decision.
Sole partner or proprietor, or sole trader
Partnership
Limited company
The limited liability company (LLC)
Limited liability partnership (LLP).
Employee ownership
Not for profit
Charity
Sole trader
The most basic structure is the sole trader or
proprietorship, which usually involves just one person
who owns and operates the business. You have
complete control over your business and make all the
decisions.
If you decide to start your business as a sole trader but
later decide to take on partners, you can reorganize as
a partnership or other entity.
The tax aspects of a sole proprietorship are simple.
The income and expenses are included on your personal
income tax return. This means that any business losses
you suffer may offset the income you have earned from
other sources.
The disadvantage is that you are personally responsible
for your company’s liabilities. As a result, you are
placing your assets at risk, and they could be seized to
satisfy a business debt or a legal claim filed against
you.
Raising money may be difficult. Banks and other
financing sources may be reluctant to make business
loans to sole traders, so you will have to depend on
your own financing sources, such as savings, home
equity or family loans.
Partnership
If your business will be owned and run by several
people, structuring your business as a partnership may
be right for you.
Partnerships can be general partnerships or limited
partnerships. General partners are liable for all debts
and obligations of the company, limited partners can
contribute capital and are not liable for debts and
obligations over that amount as long as they do not
receive back their contribution or take part in the
management of the business.
Limited partnerships are more complex administratively;
a general partnership is much easier to form.
One of the major advantages of a partnership is the tax
treatment. A partnership does not pay tax on its
income but passes any profits or losses to the
individual partners.
But personal liability is an issue if you use a general
partnership. General partners are personally liable for
the partnership’s obligations and debts. Unless the
partnership agreement forbids it, each general partner
can act on behalf of the partnership, and may take out
loans and make decisions that will affect and be
legally binding on all the partners.
Partnerships are more expensive to establish than sole
proprietorships because they require more legal and
accounting services.
Corporation or limited company
The corporate structure is more complex and expensive
than most other business structures. A corporation or
limited company is an independent legal entity,
separate from its owners; it has to comply with more
regulations and tax requirements.
The biggest benefit for a business that is incorporated
is the liability protection. A corporation’s debt is not
considered that of its owners, so if you organize your
business as a corporation, your personal assets are not
at risk.
A corporation can retain some of its profits without the
owner paying tax on them. However many banks and
finance companies will often insist on Directors
offering personal guarantees for business loans.
Limited companies or corporations can be privately or
publicly owned.
It is also easier for a public corporation to raise
money, by selling stock to raise funds. Corporations do
not depend on the involvement of named partners but
can continue to trade, even if one of the shareholders
retires, dies or sells the shares.
Disadvantages are higher costs, and more complex
rules and regulations. You will probably need the
services of accountants and lawyers.
Another drawback to forming a public corporation is the
tax situation. Companies pay corporate income tax but
earnings distributed to shareholders as dividends are
taxed as personal income. However salaries and
compensation are paid before corporation tax.
A shareholders’ agreement can provide for and deal
with other important issues, including:
board constitution and control of the management of
the business
contributions of each party and how those
contributions may be applied
agreeing and amending a business plan
terms on which shares can be transferred
distribution policy
reserved matters to protect any minority
shareholders
confidentiality and restrictive covenants
ownership of intellectual property rights
Although these points can be included in the company’s
articles of association, most of them will not be
included by default on the incorporation of a company,
so would need to be amended. The articles of
association is a public document and any provisions
included would be subject to company law, limiting the
scope of bespoke provisions.
The shareholders’ agreement is a private document,
enforceable only between the parties. This affords
flexibility to tailor the provisions according to personal
requirements and circumstances.
The parties’ exit strategies should be considered when
drawing up these documents, and may be factored into
agreements.
Employee ownership
This a business model in which employees totally or
significantly own the company.
There are several formats:
The workforce directly own most or all of the share
capital
The share capital held in trust for the benefit of the
employees;
A hybrid of these two formats.
Employee ownership is becoming a popular alternative
business structure for start-ups seeking employee
commitment, long-established businesses dealing with a
succession challenge, or new forms of public service
delivery vehicles.
In the UK, employee ownership already contributes
more than £30bn each year to GDP. Growing interest
in this form of business structure in both the private
and public sector led to a 10% increase in the number
of employee owned companies created in the UK in
2012.
Economic competitiveness and high performance are a
feature of employee owned business, which tend to
have higher productivity, greater levels of innovation,
better resilience to economic turbulence and more
engaged workers than externally owned organisations.
Shares in employee owned businesses have significantly
outperformed those in the FTSE All-Share Index over
the last 15 years.
The implementation of employee ownership can be
simple and straightforward. The costs of creating an
employee owned business from the outset or achieving
an employee buyout are modest compared with other
types of company formations or mergers and
acquisitions.
Building a structure that creates a genuine sense of
ownership amongst employees is one of the
considerations when selecting the model.
Other issues to be considered include;-
How the transfer to employee ownership will be
funded
long term safeguards for employees?
How will the voice of the employees be heard?
How will senior managers be free to commercially
drive the business, and still be properly accountable
to the employee owners?
The sense of purpose and commitment that employee
ownership delivers makes this an attractive option. It
encourages retention of the very best talent to enable
businesses to compete successfully.
A practical guide to setting up employee owned
businesses in the UK is published by the Employee
Ownership Association.
The non-profit and charity
sector
The purpose of the non-profit sector is to improve and
enrich society, and create social wealth rather than
material wealth. Firms in this sector exists to make a
difference to society rather than to make financial
profits.
This is also referred to as the third sector, the
Voluntary and Community Sector (VCS), the not-for-
profit sector, the charity sector, the social sector. It is
made up of many different types of activity affecting
many aspects of society.
The term, the third sector, indicates that it sits
between government (the public sector) and the private
or commercial sector.
These companies can exist in a range of formats from
social enterprises, trades unions, public arts
organisations, community interest companies, voluntary
and community organisations, independent schools,
faith groups, housing associations, friendly societies,
and mutual societies.
They must be registered and approved by the relevant
governing body and abide by their regulations. Because
they broadly exist for public benefit they are usually
eligible for a range of income and property tax
exemptions.
Whatever option you choose for your structure, the
name you choose for your business should reflect the
image you want to project to your market. Select one
that’s easy to pronounce and remember. And make sure
that it’s not already in use, that it is available as a
web address and will work on your business stationery
Comments
Post a Comment